I wish to thank the Spanish Ministry of Science and Technology, through Project ECO2009-09732, and Basque Government grant IT-241-07 for their financial support. Helpful comments from the editor and two referees are deeply appreciated. The usual disclaimer applies.
A NOTE ON INFRASTRUCTURE EXPENDITURE, UNCERTAINTY AND GROWTH*
Version of Record online: 24 AUG 2012
© 2012 The Author. The Manchester School © 2012 John Wiley & Sons Ltd and The University of Manchester
The Manchester School
Volume 81, Issue 6, pages 941–960, December 2013
How to Cite
ECHEVARRIA, C. A. (2013), A NOTE ON INFRASTRUCTURE EXPENDITURE, UNCERTAINTY AND GROWTH. The Manchester School, 81: 941–960. doi: 10.1111/j.1467-9957.2012.02328.x
Manuscript received 22.9.10; final version received 12.6.12.
- Issue online: 8 OCT 2013
- Version of Record online: 24 AUG 2012
This note extends the Barro (Journal of Political Economy, Vol. 98 (1990), No. 5 part II, pp. S103–S125) model to a two-period, OLG economy with aggregate uncertainty. We show that the government sizes maximizing average growth and individual welfare in a market economy coincide and are not affected by the introduction of uncertainty. The maximum average growth rate, however, does depend on the aggregate uncertainty, the individuals' risk aversion and how the intertemporal elasticity of substitution compares with one. Individual welfare is lower in the stochastic economy. Failing to include uncertainty overestimates the effect of changes in the government size.